Growth in Medicare's hospital outpatient care: implications for prospective payment

Medicare hospital outpatient expenditures are growing rapidly. In response, Congress mandated implementation of a prospective payment system (PPS). The potential cost control effectiveness of a PPS is assessed in this paper by decomposing growth in charges into changes in beneficiaries, prices, case mix, encounters per beneficiary, services per encounter, and intensity per service. This paper examines aggregate growth rates and rates disaggregated by type of service, highlighting rapid growth in surgery and imaging services. Findings indicate that 69% of observed growth is attributable to factors that would be unaffected by an encounter-based PPS (i.e., beneficiaries, prices, case mix, and encounters per beneficiary). We conclude that effective cost containment may require implementation of direct volume controls in addition to a PPS.